Term life insurance can be tricky for seniors as 95% of policies never pay death benefits. The ability to sell a term policy often comes as a shock to many sellers who expected nothing in return. What was thought to be a sunk cost can turn into a cash windfall often equivalent to selling a second home!
Those with a term life insurance policy may qualify for a term life settlement. A life settlement is a safe option of selling (all or some of) one’s life insurance to a third-party investor (called provider). A term life settlement is a safe alternative and should always be considered before lapsing, surrendering, or exchanging a life policy. Bridge is a licensed, life settlement broker who ensures sellers are treated fairly. Unlike direct buyers, brokers have a fiduciary duty to the policyholder. If you’re thinking of selling your term life insurance policy, consider consulting a life settlement broker first.
As with all settlements, qualification and appraisal value are determined by three main criteria;
- Age: Must be 65 years or older unless diagnosed with a critical or chronic illness (no age restriction).
- Health: Any health status may qualify
- Policy: Term life insurance or convertible term life insurnace
Let’s consider how these criteria factor into a term life insurance settlement in more detail.
Age Requirements for Term Life Settlements
As mentioned, those 65 and older may qualify for a term life settlement unless there are health impairments.
How Health Can Impact A Term Life Settlement
Let’s review each case;
For terminal patients under 65 years old
You may still qualify for a term life settlement even if you have a critical illness. This type of case would be reclassified as a term viatical settlement which may include additional tax benefits. Check your policy for an “Accelerated Death Benefit” clause which may allow you to receive proceeds direct from the carrier first, if not contact a life settlement company to review your case.
For seniors 65 and older
Good health does not disqualify a policyholder but it can impact the offer. Since term life settlements hinge on life expectancy (a report showing how long an insured has left to live), those with poor health tend to receive higher offers than healthy insureds. To be fair, this is not always the case, as offers can depend on the policy characteristics (more on this below). Each term policy is classified by health status which can usually be found in the title of the policy’s cover page. The cover page or “coversheet” is a summary of the policy. Let’s look at how these policy details can impact the offer amount.
Term Policies for Life Settlements
How does a term policy itself affect the offer value? Here are some general characteristics buyers gravitate toward;
Class & Premium Schedules: The title on the term coversheet may describe the policy as “preferred or standard”. Basically, good health is often rated as preferred and thus pays lower premiums and vice versa. Lower premiums are obviously more favorable since buyers will be taking over the premium payments from the insured until they pass. Most term policies have fixed rates over a period of time (terms) 10 years, 15 years, etc… Some term policies will go to age 100 with favorable premium schedules. If you’re unsure, contact a life settlement company to review your policy.
Death Benefit Amount: Term policies can have large death benefits making them favorable to investors. However, this is not a requirement. The minimum death benefit for most qualified life settlements is around $100,000. For example, a $12M term policy MIGHT have more opportunity of selling than a $50,000 term policy. Consider this: It costs brokers and providers thousands of dollars to take on a term life settlement case. The death benefit is what the buyer collects only after paying all upfront/closing costs, the settlement payout to the insured, and future premiums. It has to be worth the provider’s time. Conversely, if an insured with a $90k term policy has less than a year to live, they may get a favorable offer between 20-80%. If you’re not sure that your death benefit qualifies, contact a life settlement broker.
Conversion Period: A conversion is a clause in the policy that allows the policyholder to convert their term life to a whole life policy. Although this is not required for a term settlement, conversions are favorable to buyers. Whole-life policies are not confined to time. These policies are not outlived and can go past age 100 thus further securing the providers investment.
Other Term Policy Types
Term Life Survivorship: Policies MAY NOT qualify.
Keyman Term: Policies MAY qualify. Ask Bridge.
Group Term: Policies MAY NOT qualify.
Term Life Tax Considerations
After having a life settlement broker appraise your term life policy, consider the tax implications regarding any gains against your premium basis. Depending on state, usage, and health, term-life settlements may be tax-favored. Talk to your local tax professional for more info.
Term Life Settlement Potential Risks
A term life settlement proceeds may have claims from creditors, may affect Medicare Part B, further life insurance eligibility, and are subject to taxes and fees. Consider pursuing Accelerated Death Benefits (ADB) if a policy includes this option before a life settlement. Never take out a policy with the intent of selling to a stranger or warehouse a policy with the intent of selling after the contestability period (STOLI). If a company approaches you with this option make a claim to your state CFO or FINRA.
How To Prepare For A Term Life Settlement Appraisal
Before talking with a life settlement broker, save time by having the following handy;
- A copy of the life policy (digital PDF preferred but not required)
- A copy of the coversheet (includes the title policy, carrier, insured information, and issue date)
- A copy of the payment schedule within policy
- A PDF copy of medical records from the last 3 years (get from a primary doctor or digital portal and include medication list)
What To Expect During An Term Life Settlement Appraisal
Working with a life settlement broker is pretty basic. A quick review of the insured’s situation and policy will determine the qualification status. If an insured qualifies for a life settlement, a few signatures are needed to access med records (HIPPA), Life Release (illustrations/policy details), and Disclosure (what to expect). After signatures and the above information are collected, the application process begins and is presented to multiple buyers for real offers an insured can accept, reject or counter.
Final Thoughts
If you’re over 65 years old and have an active term policy, you should have it reviewed annually by a licensed life settlement broker. Unlike direct buyers, brokers (not just a “marketing organization”) have a legal fiduciary duty to the client’s best interest. Brokers often work for free upfront and are only paid a fee if a client accepts an offer to sell a policy. Moreover, brokers can help policymakers save time by streamlining the application process putting it in front of multiple buyers to obtain the highest term life settlement offer.
